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Sending Personal Investments Offshore Is More Complicated Than You Think



Hale Stewart

A quick reminder about sending investment portfolios offshore.

The U.S. taxes residents on worldwide income. From the Treasury Regulations:

In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States.

Sending assets to an offshore trust might create unwanted capital gains. Code section 684 imposes the following rule on transfers to an offshore trust:

Except as provided in regulations, in the case of any transfer of property by a United States person to a foreign estate or trust, for purposes of this subtitle, such transfer shall be treated as a sale or exchange for an amount equal to the fair market value of the property transferred, and the transferor shall recognize as gain the excess of–

(1) the fair market value of the property so transferred, over

(2) the adjusted basis (for purposes of determining gain) of such property in the hands of the transferor.

Sending appreciated assets to an offshore corporation creates the same problem; see generally section 367 of the tax code. And that’s before considering the potential implications of the foreign personal holding company rules of the controlled foreign corporation statute contained in section 954.

And anytime you use a partnership, the income naturally flows back to the partner due to the partnership’s flow-through nature.

In short: it’s much more complicated than you might think. Or, in standard parlance: if it sounds too good to be true, it probably is.

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Mr. Stewart has a masters in both domestic (US) and international taxation from the Thomas Jefferson School of Law where he graduated magna cum laude. Is currently working on his doctoral dissertation. He has written a book titled US Captive Insurance Law, which is the leading text in this area.

He forms and manages captive insurance companies and helps clients in international tax matters, US entity structuring, estate planning and asset protection.